Anadolu Efes Biracilik ve Malt Sanayii Anonim Sirketi (AEFES) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Anadolu Efes's Third Quarter 2021 Financial Results Conference Call and webcast. My name is Asli Demirel. I'm the Head of Investor Relations of Anadolu Efes. Our presenters today, Mr. Can Çaka, the CEO; and Mr. Gökçe Yanasmayan, the CFO. [Operator Instructions] Just to remind you, this conference call is being recorded and the link will be available online. Before we start, I would kindly request you to refer to our notes in our presentation regarding forward-looking statements. Now I'm leaving the ground to Mr. Can Çaka, Anadolu Efes CEO. Sir?

Thank you, Asli. Good afternoon to all. We've been continuously talking about the COVID for the last couple of quarters. However, I mean, obviously, this summer was -- we have seen across the board, eased restrictions and increased mobility. And that helped us throughout the quarter, and we managed to deliver another strong volume performance in this -- the most -- the biggest project for our business. We had remarkable performances on both these segments. And volumes at Beer Group operations where we have recorded solid growth, while soft drink business also continued its strong volume growth momentum that was both domestically and internationally. And on the Beer Group side, the volume growth was mainly supported by the growth on the international segment. July specifically was an exceptional month for us. And we have in Russia recorded one of the highest ever monthly sales. Similarly, on the soft drinks, we have seen historical numbers for Turkish domestic operations. So -- and with the increased mobility, we also see increased number of COVID cases afterwards. So that has impacted for the second half of the quarter in all respects. So thanks to our almost 24% increase in terms of revenue per hectoliter on a consolidated basis, we had also had on top of the volume growth, and we had a very solid revenue growth. And the value focus, obviously, that has been improved with the price increases, which were implemented through the year and a big focus on profitable revenue growth management initiatives yielded this very strong growth on our revenue on top of the volume growth. On the other hand, the challenges continue. So obviously the rising commodity and raw material prices starting from this quarter, we have seen the impact on our financials and thanks to hedges in place, the impact has been limited, but the current levels of commodities and raw materials unfortunately keeps us awake for the next year, especially. We already started to fix some of our exposure for the next year. And Gökçe will take you through this in his part. On top of that, we have started to implement price increases in all of our operations, especially on the beer group offer during the quarter 4 in order to mitigate such impact and also being ready for next year's planning and implementations in order to ensure there's a smooth transition for the new price levels to cover this cost of pressures. In order to overcome this pressure on the Rosstat royalty, we also had continued our tight OpEx management, especially on our international operations despite cycling an already a very low level, you would remember last year to really peak of the pandemic, we were discussing about real tight OpEx management, and this is becoming a kind of a trend continuing to end for us. Specifically on Turkey, we continue to invest in marketing in terms of our relaunch of our flagship brand that has a slight impact. But still, we continue to be very cautious on our OpEx management here in Turkey as well. And that in result help us in generation of quite high free cash flow through the quarter as well and predominantly due to the international beer operations at CCI and we have an outstanding performance on both in terms of the working capital and also prudent CapEx management that supported the free cash flow generation. There's some performance in free cash flow generation, we purchased for the year-end. However, the current core working levels are expected to be normalized slightly in the last quarter of the year, that we will see some modernization in this strong free cash flow generation for the rest of the year, in line with our guidance. Going on to the next slide. As you can see on this slide, we already had a sound performance in the first half, especially on the Beer Group and on the [ latest ] level, and we -- where all metrics were above last year. And in the third quarter, we managed to keep the same pace, expect with the impact of the commodity prices that I mentioned a little bit earlier, and that had an increase -- that had an impact on the gross profitability, which was filtered -- which filtered through the EBITDA performance. And group free cash flow was slightly below last year as well in the third quarter, however, beer group free cash flow generation. However, as you see, for the first 9 months, we are strongly ahead of last year, and this is mainly pacing of the different -- the pacing of our working capital with respect to different quarters and also a low CapEx base. And consolidated sales volumes were up by 10% and reached to 36 million hectoliters in the third quarter. And similarly for the Beer Group volume was 4% higher, reaching to 11 million hectoliters. Revenues grew by 35% and if we exclude the impact of the FX translation, the increase was still strong around 22%, leading our top line to close to TRY 12 billion backed by the price increases, premiumization and productive revenue growth management actions, contribution of the beer group reached to 42% with TRY 5 billion contribution and then 33% growth. And the consolidated EBITDA was 13% above last year, getting close to 4 percentage points, declining margins mainly driven by the decline on the gross profitability level. All in all, I mean, we have seen, as I mentioned, certain challenges. We are seeing increased number of COVID cases, but still, that is putting slightly pressure on the mobility, and that is especially for Turkey collecting into lower tourism activity. And also and specifically in Turkey by tourist [indiscernible] some provinces and province in northern part of the country during earlier result again, put pressure in Turkish business. And the commodity price increases, we are seeing the impacts. However, despite all these challenges, we are seeing a very strong performance with 39% revenue growth and 33% profitability growth with almost 50% free cash flow generation. More details on the Beer Group now. And as noted, our Beer Group volumes continued its growing trend and increased by 4.4% in the third quarter of the year. And international beer operations volume were even higher, expanded by more than 6%, supported by the performance -- our performance in -- specifically in Russia and Georgia to some extent. Russia had a remarkable performance despite the high base of last year, but there was not tourism outside of the country. May, July, due to the extraordinary high temperature recorded in the country, our volumes, as I've mentioned, have hit its pre-COVID levels. And we are keeping our focus on our premiumization strategy, focusing on the growth of our premium and super premium brands such as [indiscernible] Bud and Stella [indiscernible]. And we [ sold ] the strongest [ slot ] to this quarter. And non-alcoholic beer is also another focus area for us, and we have seen more than 40% growth compared to last year. And we see specifically for the non-alcoholic beer, we also benefited from the online delivery services. We are also increasing our partnership with some brands in order to increase the penetration of our non-alcoholic offerings and we had also further co-operations with the on-trade chains and those are all contributing back to our business, and we are growing non-alcoholic beverages. And also, we have adjacencies to beer that we are growing in those categories as well. Specifically for international operations, we have seen a cost decline, specifically in Ukraine, mainly driven by the higher price increases versus the competition. Our volumes also affected by the unfavorable weather conditions in the country. However, we are similar to Russia in our volumes. So international operations, we are trying to do it by brand portfolio by the different alternatives, including non-alcoholic beer adjacencies and premiumization focus and adding new flavors, and so forth. And then growing our business case, however, as I mentioned, higher than pricing -- higher on pricing rather than competition. Deep discounting from competition impacted our volume specifically. Our volumes in Kazakhstan and Moldova were up by mid-single digits. And in Georgia specifically grew more than -- almost 30%. We managed to improve our volumes in all these countries with a new product developments, re-launches of mainstream brands and increasing our, let's say, focus on execution and increasing our touch points with our consumers, our go-to-market. We also observed a solid increase in our on-trade volumes in Turkey right after the release of the restrictions starting from July onwards. However, as I mentioned, August was impacted with the sad events in Turkey, forest fires, and then what with tourism, so on and so forth. So starting from the second half of the year. So despite the criteria, especially with the beginning of the quarter was strong. We have seen, let's say, slower volumes in the second quarter of the second half of the quarter. They were -- therefore, our volumes were down by around 5% versus last year. Another area we are focusing is our complementary culture. We -- as I tried to mention about different countries, we're trying to expand our offerings and now from -- and we reached our consumers with the flavored beers, with different specialty beers, with seasonal beers and also, we recently -- the most recent example is our gluten-free beer offering in Turkey. So all these new offerings are adding to our portfolio, into our volumes, and into our, let's say, profitability. So in that perspective, we have taken the innovative leadership in every other country, expanding our portfolio nicely and profitably. As usual, a couple of words on the soft drinks, which is growing fantastically. As a result, similarly, the eased restrictions and increased mobility help our business segment and CCI's consolidated sales volume expanded very strongly and grew by more than 11%. Here in Turkey, volume growth was around 15% as a result of the focus on segmented market campaigns, effective promotions, obviously, and seasonal offerings on this -- on the soft drink segment as well. And the high penetration on the e-commerce, which is growing fast in Turkey, especially [indiscernible]. And more importantly, sparkling beverages recorded a growth by around 13% and Coca-Cola brand itself growing over 13%. Still category increased by 21%, especially supported by a strong iced tea and energy drink performances. Water category was up by 18%, especially thanks to the increased share of the small tax. International operations grew by 9% despite -- and specifically in Pakistan despite the price increases during the quarter. We've seen the volume performance around 8% and continues with this growth this time on top of the price increases with better execution and increased penetration. CIS grew by more than -- around 20% in the third quarter. All CIS markets on the soft drink cycles delivered with double-digit and high single-digit volume growth except for Turkmenistan. And Middle East we have seen a decline at 5% cycling a high base of last year. And going to the last page, basically, we discussed around the performance in the prior pages. This is a kind of, let's say, summary. But let me touch base with the bottom line we haven't discussed. We recorded a net income around TRY 456 million in third quarter bringing our net income level to almost TRY 1.3 billion range. The year-on-year financial expenses were higher, there was a one-off negative impact coming from CCI regarding noncash provision for spare part amortization was hitting the bottom line. However, thanks to the higher operational profitability as well as gains from again, the sale of landing at CCI level, our net income increased more than 20%. Similarly, for the free cash flow generation, we have recorded more than almost TRY 4.3 billion cash generation in the first 9 months. That is TRY 1.4 billion higher than what we have generated throughout the first 9 months of last year. And that increase was supported equally by both beer and soft drink segments. As I mentioned, that would partly be normalized to the third quarter. But again, that's a very strong performance. Now I will hand over to Gökçe to -- for further details on our performance. Thank you.

Thank you, Can. Good morning, and good afternoon, everyone. I'm going to take you through the financial results. Actually, I'm quite happy that we are reporting another successful quarter. If we start with beer business, this is the third quarter in a row in 2021 Beer Group reports growth in volume and in both top and bottom line. And as Can was also saying earlier, you have seen strong volume growth in our international beer business, especially remarkable volume performance in Russia and Georgia in third quarter versus last year. Beer Group sales revenue was again substantially ahead of volume and grew by 22.5% in third quarter versus last year and on a constant currency basis increased by almost 17%. Besides growth in volume, price increases across the board and a favorable product mix supported solidly our top line. As a result, Beer Group sales revenue in 9 months 2021 reached TRY 12 billion with a year-on-year increase of 31.3%. The pressure on the gross profit in third quarter due to raw material and commodity price increases has started to impact Beer Group EBITDA and margins too. The good news, though, despite cost pressure, EBITDA grew by 5.1% in third quarter, thanks to successful revenue growth management as well as savings in especially international operations OpEx. Beer Group cash flow was almost parallel to last year's high base. And in 9 months, free cash flow reached TRY 1.5 billion, significantly above last year. I'm going to give more details on EBITDA and free cash flow in the following slide. When we come to Anadolu Efes consolidated financials, CCI continues to contribute significantly to bottom line and top line performance in third quarter too and consequently, consolidated net sales revenue was up by 34.9% in third quarter and by 39.4% in 9 months, and consolidated EBITDA grew by 12.8% and by 32.3%, respectively, in third quarter and in 9 months, while free cash generation is well above last year and reached TRY 4.2 billion. I believe EBITDA free cash flow bridges on Slide 11 make it easier to show impacts that I was talking about on our Beer Group results for third quarter. So if I summarize again, what you see in the EBITDA bridge is a strong revenue management resulted by a combination of factors like volume growth, price increases and favorable product mix and also a very successful OpEx management we see as the increase in OpEx is notably lower compared to revenue growth. And worth mentioning here that this comes over a very low OpEx levels of 2020. So the main challenge actually is cost of sales growing ahead of revenues. And again, to remind this is due to rising commodity and raw material prices. I'm going to show you in a while the details of commodity hedges, which has helped us to partially limit the impact. And the other line that you see in EBITDA bridge mainly refers to currency translation. All in all, we achieve to grow last year's high base EBITDA in third quarter. Free cash flow, like EBITDA had a high base in 2020 as a result of significant improvements in working capital as well as very prudent CapEx spending. In 2021, though, in line with our planning, we spend more CapEx, which naturally has a negative impact on our free cash flow. However, strict working capital management, specifically in Russia, continues to contribute positively. As an additional note, I have to say that cash cycle days in all operating countries improved versus last year. Our working capital to sales ratio is at record low levels across the board. In addition to working capital changes, incremental EBITDA generated is also positively impacting. Overall, we are successfully landing close to high level of last year and generate TRY 435 million in third quarter. Now if you look at the balance sheet, on the Beer Group side, we are at 1.7x net debt-to-EBITDA and another [ FS ] at 4x to 8x multiple. So we are looking at a very healthy set of numbers. You may remember from our previous call or announcements, we have issued a new bond of USD 500 million to refinance our existing bond maturing in November 2022. With this exception -- of our existing Eurobond matured for another 7 years, our average debt maturity now is 4.3 [indiscernible]. And Eurobonds remain as the only FX debt exposure in our balance sheet. When it comes to cash, our policy is to hold the majority of our cash in hard currencies. And consequently, as of end of September, we hold above 80% of our cash in hard currency. And when it comes to risk management, from commoditizing point of view, we are hedged by 100% for the aluminum for 2021. However, we plan intentionally a bit slower for 2022 hedging as commodity prices were hitting record levels, high levels for the last 10 years or so. Currently, we are close to 30% for next year. PET, again, hedged 100% for 2021, 76% for 2022. And last but not least, from FX hedging point of view, I would say that we have hedged currently almost 50% of our exposure of 2022 in Turkey. So this concludes my presentation. I will give the word back to Can, and thank you.

Thank you, Gökçe. With respect to year-end estimates for our outlook, we are revising our guidance for Anadolu Efes. Obviously, that has been above the upgrade in the soft drinks, given the strong business momentum year-to-date. And also, with the inclusion of [indiscernible] the soft drinks consolidated results will be affected by a couple of percentage points at volume and revenue levels, while there will be a slight dilution on EBITDA margin. We made no changes in our Beer Group expectations, especially on the top line. However, we are a bit cautious on meeting our profitability margin guidance considering the upward price trends in the global commodity markets and raw material prices, together with the higher inflationary environment we have seen. As I tried to explain, we are trying to mitigate all this by earlier price increases through the quarter and we'll see the impact of -- and accordingly, we now expect our consolidated volumes to grow by mid-to-high single digits and revenues to grow by high teens to low 20s in the FX-neutral basis. We still expect to deliver strong free cash flow, yet we expect some normalization compared to the fantastic 9 months numbers I would say. So this concludes our presentation, and we will be very happy to answer your questions if there would be any. As Asli mentioned, you can write down your questions. And thank you all for participating to the conference call.

We have already 2 questions at the moment. Let me read both of them. How much of the negative TRY 532 million in cost of sales was related to raw material increases? And the second one is have you increased prices in Russia during the third quarter? If so, how much?

Maybe I can start with the cost part. Almost 2/3 of our increase, we can say that it is attributable to raw material increases.

We have already made a price increase in the -- in August in Russia. And as I mentioned, beer operations, and we have started to have price increases in September, in October and November in different cases. In Russia specifically, after the price increase at the beginning of January, now in August, we have increased slightly more than 5% price in Russia.

There is another question from [ Hoegaarden ]. I have 3 questions. How much margin headwind do you expect in Q4 and 2022 from rising commodity and raw material prices? The second one is after strong cash generation from our working capital, do you still see room to generate cash flow on working capital in 2022? Can you please comment around recent demand trends, particularly in Russia?

Yes, I can...

Margin pressure side.

Well, Q4, we expect a similar or slightly better to Q3 weighted. With the price increases that we are putting in place, our expectation would be slightly better, but similar to Q3 margins.

Asli, what was the second question? You started -- you say one question, but [indiscernible].

Yes. I mean, the second one was related to cash generation. After strong cash generation from working capital, do you still see room to generate cash from working capital spread?

Yes. Well, I mean, specifically for the beer operations, I mean, our, let's say, working -- obviously, we have reduced our working capital significantly, so throughout last year. And then this year, we have generated cash from our working capital. That's a very valid observation that at this level, that would be much difficult to raise further cash. But please keep in mind that now our working capital is negative. So as our balance sheet expands, the working capital will still be because it's negative on the negative -- it would positively impact the free cash flow generation as it expands. With respect to the demand side, we are seeing similar trends in every other markets. So I would say, shortly.

[Operator Instructions] Yes. We have one more. Do you have an estimate of what the negative effect from raw material increases will be in 2022? More specifically, how much will cokes per hectoliter increase?

Well, let me jump in. When you look at the major raw materials, the [ Parley moulds ] packaging, they make 2 quarters of our total cost. And also on the overheads, we have energy, so on and so forth. So they are linked to global prices, they are linked to contributed prices. So we're also seeing significant increases there. So in that perspective, I mean, our teams are working in terms of the planning for next year. Obviously, there are 2 ways to mitigate this one is prices -- pricing and the second further OpEx management. And reducing the -- our operating expense margins on operating expense as a percentage of our revenues in revenue. So this is how to mitigate. So let's say, purpose is to mitigate almost all. But again, this is a work-in-progress. And in the meantime also, we see different fluctuations in the commodity prices. We will be better -- in a better position at the beginning of the year to give more clarity on this. But again, our willingness, our aspiration is to cover all the impact on our platforms.

[Operator Instructions]

All right. Last leg of course. Thank you, all.

We have one more. Do you plan to take more increases in Russia after the August running coming months to cover cost inflation?

Well, specifically, basically, let me reflect for all countries. Obviously, at the beginning of the year, we will -- depending on the further development and additional because we haven't taken all the price that is required to cover the tax and cost of changes or reflections for 2022. So in that perspective, we would, we are planning that. But our plans for 2022 would cover additional price increases by the beginning of the year. Specifically for Russia, I'd say let's be honest here. It is a very, very competitive market. We have seen very high pressure in terms of competition, in terms of promotions and discounts, as we have discussed in the last couple of quarters. So in that perspective, we cannot just simply -- although we have marketed, we cannot just simply disregard the rest of the market. We have taken a strong price increase as I noted earlier in the beginning of August. And we need to fully make sure that our competitors are [ rational ] on the forward [indiscernible] price increases in that perspective. We have seen -- we are monitoring that very closely. We have seen the competition increasing prices. But unfortunately, that is not in the magnitude that we have. So in that respect the further price increases would require such a gap to be closed. However, given, I mean, I'm sure all the players would be quite rational in terms of keeping the value for our business. And in that perspective, with the condition that the gap on pricing is closed, there would be constantly further price increases.

There are actually no more questions at the moment. So we can conclude.

Thank you, Asli. Thank you all for joining. I hope to see you at the end of the year.

Thank you.

Thank you for joining.